Uganda to Receive US$650 Million in Debt Relief

The World Bank and the International Monetary Fund (IMF) agreed today that Uganda has met the requirements for receiving close to US$650 million in debt relief from its external creditors, under the Initiative for Heavily Indebted Poor Countries (HIPC). Uganda has established a strong track record of economic management and policy reform. It was the first country declared eligible for such assistance in April 1997, and it now becomes the first country to receive debt relief under the Initiative.

Discounted to today’s values (i.e., in net present value terms), relief from all of Uganda’s creditors will be worth US$350 million, to which the World Bank and IMF will contribute about US$160 million and US$69 million, respectively. This amounts to a 20 percent reduction in Uganda’s external debt. Over time, the contributions of the Bank and Fund will relieve debt service payments equivalent to about US$355 million and US$80 million, respectively.

The World Bank will provide its assistance in three ways:

• An International Development Association (IDA) grant of US$75 million) in support of Uganda’s universal primary education program (equivalent to US$24 million in debt savings in today’s values);

• The purchase and cancellation by the HIPC Trust Fund of outstanding IDA credits of US$181 million (US$84 million in today’s values); and

• The payment of debt service by the HIPC Trust Fund on approximately US$39 million of IDA credits over five year (US$52 million in today’s values).

The savings on IDA charges associated with these instruments will be US$60 million.

The Bank’s assistance will cover between 38 and 50 percent of Uganda’s annual debt service to IDA over the next five years.

The IMF will provide its assistance (US$69 million) as a grant to pay part of the debt service falling due to it. This will cover about 22 percent of Uganda’s annual debt service to the IMF on average over the next nine years.

This debt relief will release resources -- estimated at US$175 million in the next five years alone -- for meeting the country’s high-priority development needs, particularly in health and education.

Uganda is one of the strongest performing economies in Africa. Over the last decade, economic growth has averaged 6 percent, inflation has been contained, and the economy has become increasingly diversified. Uganda has regained its position as Africa’s premier coffee producer. The tea industry has been revitalized, a small horticulture industry is emerging, and maize exports have been expanding. The country’s transportation system is being rehabilitated, and the government is working on the creation of a national road grid that will connect all parts of the country. In January 1997, the government launched a program of universal primary education, which resulted in the doubling of enrollments.

The provision of this important debt relief should help Uganda deepen the social benefits of the good economic management the country has enjoyed.

Background on the HIPC Initiative

The HIPC Initiative was approved in September 1996 as a means of dealing comprehensively with the debt burdens of the world’s poorest countries. It offers significant assistance to countries facing unsustainable external debt obligations, after the full application of traditional debt relief mechanisms, provided they are successfully implementing economic and social reforms. Under the HIPC Initiative, assistance is provided after a period of monitoring of economic performance. In addition to Uganda, Bolivia, Burkina Faso, Guyana, Côte d’Ivoire and Mozambique have qualified for HIPC assistance. They will receive assistance once the period of further monitoring (up to three years) is completed. The total amount of debt relief expected for all six countries is nearly US$6 billion in nominal terms.1

1Debt relief is expressed in nominal and net present value (NPV) terms. Most estimates of Africa’s debt are in nominal terms (US$235 billion) as it is easier to add up the "face value" of various obligations entered into by governments. Debt, however, takes many forms and varies considerably in its terms; but its economic impact is best expressed in NPV terms. For example, the World Bank’s lending affiliate for the poorest countries (IDA) offers credits which are repayable over a period of forty years with an annual service charge of three quarters of one percent. By the time these credits are repaid, their "net present value" will be only 20 percent of the face value of these obligations. In other words, they amount to 80 percent grants. Analysts and creditors prefer NPV figures for the simple reason that these are the more relevant for discussions of actual debt and debt reduction and to allow for a proper comparison among debts contracted on different terms. But the nominal figures are also important for understanding the full extent of the debt relief provided over time on actual debt service to be paid. In general, the longer the period over which debt relief is provided, the larger is the nominal amount of relief associated with any given NPV calculation.